Move over London and N.Y., there’s a market shift going on
June 26, 2008
In the latest skirmish, New York has beaten back London in a tussle in the Gulf . NYSE Euronext has won a contract to build a cash and derivatives market in Qatar and the transatlantic exchange will take a quarter share of the Doha Securities Market. The London Stock Exchange had been the lead contender for the deal because the Qatar Investment Authority had amassed a 15-per-cent stake in the LSE.
It’s a blow for the LSE, which is keen to spread its wings, having beaten off several takeover bids from America and Europe. But the LSE has only itself to blame. A key factor in the loss of the Qatari deal was lack of a presence in derivatives, an expertise the LSE failed to acquire in 2001, when the London Exchange allowed Euronext to purchase Liffe, London’s premier financial futures market.
The continuing rivalry between New York and London is fascinating, but the intrigue that caused LSE shares to rise to a heady £20 ($38.84) has fallen away and the current price of £8 reflects a general belief that a takeover is unlikely.
While NYSE and Euronext are joined at the hip, Nasdaq is wedded to the Nordic OMX and the somewhat disappointed LSE is paired with Milan. Moreover, Qatar and Dubai together own 30 per cent of the LSE; these Emirates now hold the cards, another indication that the focus of investment activity is rapidly shifting from the established markets of the West to the emerging financial markets in the Gulf and the Far East.
Rivalry in the Gulf is intense, with Dubai setting the pace as the city state pump primes the financial service sector with commercial property and leisure developments.
Dubai needs these markets to succeed – it has virtually run out of oil. So far, the Dubai stock market is a tiddler, lacking sufficient liquidity because too much of the domestic capital is locked up by the state, or rather, the Emir and his family. Its neighbour, Abu Dhabi is also very active but still has the prop of significant oil reserves while Bahrain, which has been an established Gulf financial centre for several decades, has set out its stall as a centre for Islamic finance.
Qatar is trying to make up quickly for lost time; its wealth derives from the world’s biggest gas field. But it lacks the relative sophistication and westernized culture of Dubai, which has been a magnet for professional service firms – lawyers, accountants and engineers who use the city as a hub for the region.
The question is whether the huge inflows of capital into the region from oil and gas revenues can be retained there or simply recycled and exported. According to Brad Bourland, economist at investment bank Jadwa, the oil revenues accruing to Saudi Arabia, the UAE and Kuwait up until 2030 will total some $17-trillion (U.S.), assuming an oil price of $100 per barrel. During the 1980s, there was no infrastructure – financial, commercial or industrial – to absorb oil revenues and the money flew into U.S. treasury bills and dollar accounts in the U.S. and in Europe. Today, infrastructure expands at a colossal pace and the requirement for investment is huge. Saudi Arabia alone has $390-billion in projects under way, half in oil and gas, petrochemicals and power generation. The Gulf countries understand they need to earn more from their oil and gas endowment so they are expanding into chemicals, steel and other primary industries.
There are efforts to establish commodities markets in the Gulf and the Far East. Hong Kong has just announced plans to establish a fuel oil futures contract. Dubai Mercantile Exchange has already launched a sour crude futures contract with the help of Nymex, home to America’s benchmark crude futures. Sour crude represents the majority of the world’s oil and it is growing in dominance as the popular light, sweet crudes diminish in volume. The Dubai contract struggles to gain acceptance as Saudi Aramco is still unwilling to use it as a benchmark to price its own crude.
There is little doubt, however, of the logic that suggests the focus of oil trading will shift to the main suppliers as North Sea and U.S. supplies begin to dwindle. It’s a challenge for London and New York, and attempts by the U.S. Congress to strangle the trade in futures out of fear that speculators are manipulating the oil price is dangerous and naive.
If the market is hamstrung in New York and London, it will move elsewhere and it now has somewhere else to go.